Exposure of United Bank

It is now detected and well established by Auditors that top officials of the bank used to switch off the button which automatically detect bad debts. Since long, apprehension from many corners have been expressed candidly that bank officials use to hide bad debts to book higher profit by making lesser provisions.

But unfortunately RBI and Ministry of Finance willfully remained silent spectators of all such evil acts so that people cannot point out accusing finger towards them and they continue to use the public applaud for shining banks.

Due to such indifference and killing silence, customers and investors along with bank staff are sufferer and there is none to compensate them .Customers of the banks are not getting loans and adequate services due to demoralized mindset now, Investor shareholders of UBI have suffered loss in share value and staffs of blacklisted bank are denied wage hike.

Auditors say that it is not clear who are behind this menace and this dirty act. Auditors are again managed to write the story of doubt which portrays a soft picture about continuing fraud so that top officials who are mastermind behind tapering of the system are exonerated by giving benefit of doubt.

Some questions arises in my mind which are as follows

First and foremost question is who used to control the technology and the system and are they booked to task?

Who are the officers entrusted to monitor the functioning of the system and how they failed to detect the technological fault for such a long period?

 Were officers not tallying and matching the system generated bad debts from manually detected bad debts?

Whether branch Officials who were in direct touch with bad accounts did not point out the faulty outcome shown by the system? 

Or top officials themselves managed the ill-motivated task at their end i.e. at central office?

Each bank and each branch of the bank used to run and were supposed to run parallel manual exercise for detecting and identifying bad debts to synchronize the mechanized system of detection of bad debts until machine starts giving correct result. 

Why banks failed to do such exercise and who are responsible for such gross negligence?

Was it not a intentional conspiracy of seniors to conceal bad debts?

How the switch remained off for years and prudent officers could not sense it in time? It gives stinking smell of the dirty intention behind such foul game.

It is definitely not controlled by any junior or middle management officer. Without concurrence and guidance of top officials, junior or senior officers do not have courage to play with the well protected system.

Is it not true that top management of the bank willfully reduced NPA to present better balance sheet and then to ensure grand success of public issue which UBI had to bring in the market in the year 2010. 

Will RBI call explanation of ED and CMD of last ten years and also the type of culture they inculcated in the bank and type of culture they inherited from their previous banks to assess the character, knowledge and greed for money and post?

Will RBI also peep into the performance of those banks where from they were elevated to the post of ED or CMD?

RBI has ordered scanning of new loan accounts disbursed by new CMD, But result of such audit may not tell truth of the past loans which has turned NPA this year .

 RBI is trying to cover up the evils of past ED and CMDs who allowed and promoted bad culture for their vested interest?

If RBI punishes all responsible General Managers, EDs and CMDs of last ten years who failed to keep technology working without tapering ,who failed to ensure switch on of Infosys system and software and  who committed irregularities either in sanction or in monitoring, the message will go to other banks too and thing may improve at least from now.

It is open secret that banks are still involved and indulged in bad lending and there is no doubt that bad loan will rise every quarters to come and in all public sector banks. I have no doubt that same position exists in all public sector banks as it is found to be in United bank during forensic audit . Every bank has kept switch off willingly and intentionally to keep NPA low. Only difference is that new lady CMD of UBI has not tried or failed to managed auditors in hiding NPA whereas other ED and CMDs are clever and smart to prevail upon auditors to get the certificate as per their sweet will.

Will RBI order conduct of forensic audit of SBI where volume of bad debts run in lac of crore of rupees.

 If RBI can protect loss arising from such bad assets,I hope bank staff can be paid 100% wage hike without creating any fall in their future profit.

Second question is whether the top officials of United bank of India were and are so much ignorant about the health of high value loan accounts that they could not think it wise to test the correct working of their machines.

Whether it is not their duty to verify the correctness of the volume of bad debts?

A true banker knows very well the prominent loan accounts which are sick in quality or on the verge of going sick.

Rather it may be said without doubt that it is a well planned way of concealing bad debts and this dirty game has been persisting in almost all public sector banks since long. It is not a story of two or three years as claimed by clever and managed auditors, it used to be there even when machine or core banking solutions were not in place.

When CBS system technology was not in vague and manual working was done in bank to identify bad debts, top officials of banks used to say openly in meeting that none of branch head can declare any account as NPA until they are permitted by top officials on phone. Not only this , if any courageous officer dared defy the verbal guidelines of their bosses and used stick to RBI norms in identification of bad assets , they had to bear the brunt of top management . And without fail such sincere officers were rejected in promotion process and got the most critical remote transfer orders.

Further it is not only a singular case of making less provision to inflate profit of the bank, RBI is well aware how top officials of the banks used to make lesser provision or make no provision for pension and other terminal benefits to inflate profits. 

When this fraud was detected, RBI officials or officials of Ministry of Finance who were from behind the scene working in collusion with top officials of the bank and who used to misguide in banker meeting and who were protecting dirty game of bad bankers, allowed banks to make provision for residual terminal benefits and pension and amortized the same in five years so that huge burden may not adversely y affect the balance sheet of a bank and tarnish the image of the bank. If bad news spreads in the market, the share value could fall sharply and the wealth of many stalwarts could vanish who had invested huge money in shares of the bank.

Obviously there is no doubt that the fraud which has been detected by auditors in United Bank of India was committed by top officials of the bank and it is the duty of regulating agencies and CBI to call for explanation from Head of the bank and that from General Managers and Executive Directors who were mastermind behind the dirty tricks. Further they should try to peep into the balance sheets of other public sector banks so that the greatest scam of the country could come on the floor and people of India may understand the risk ahead.

All guilty, persons, whosoever it may be, heavy weight or low weight officer, must be punished in the larger interest of the customers investors as also staff working in the bank. Management of United bank has cheated investors by hiding bad assets , by making lesser provision and by showing inflated profit. Even  SEBI should  look into this fraudulent game with investors played by UBI  when they came out with public issue in the year 2010..

Exposure of UBI management  will open the eyes of Finance Ministers and politicians who has damaged the fundamentals of the bank by adopting vote bank policies and by pressurizing top bankers verbally to go for all such acts which adversely affects the profitability of the bank.

Especially PC should be made to understand that if bank staffs are not well paid and if bank staffs are not awarded for honesty and sincerity, health of banks has to be bad.

If flattery is the only quality for promotion and respect, volume of fraud and bad debts in government bank will continue to rise and endanger the deposit of innocent common men who keep their hard earned money in government banks only considering them safer than private banks.  

I therefore always say that as long as flattery and yesmanism is the culture in any bank or in any office good workers cannot survive respectfully and only bad officers will prosper and the bank has to suffer in its intrinsic value. Exposure may be delayed by clever team of corrupt officers.

No Fresh Fund By Government To Banks

No fresh funds for state-run banks in Budget: finance ministry official-LiveMint

Sandhu said that there is no pressure from the govt on state-run banks to sell their non-core assets to raise capital

Mumbai: G.S. Sandhu, financial services secretary in finance ministry on Friday ruled out higher fund allocation in the forthcoming Budget to recapitalise state-owned banks.

 

“Not in this budget. If there is any urgent requirement, the government is always there,” Sandhu told reporters in New Delhi on Friday after attending the board meeting of the Life Insurance Corporation of India.

 

In the interim budget presented on 17 February, the previous government had proposed to earmark Rs11,200 crore towards equity infusion in public sector banks, which have been facing severe asset quality pressure as bad loans continue to mount.

 

Total non-performing assets (NPAs), or bad loans, of public sector banks stood at 4.4% of advances at the end of March.

 

Union finance minister Arun Jaitley is set to present the Budget next month.

The banking secretary said that there is no pressure from the government on state-run banks to sell their non-core assets to raise capital.

 

“There is no pressure (to sell non-crore assets). We are just examining what all options are available to raise additional capital,” Sandhu said.

 

He said the government is likely to take a decision on a proposal to create a holding company structure for public sector banks before the budget.

 

“I am hopeful that by the budget, we would have made up our mind on this (holding company structure),” Sandhu said, adding that the Budget would have a road map on it.

 

The Reserve Bank of India-appointed P.J. Nayak Committee had called for lowering the government’s stake in public sector banks to 51% to meet their capital requirements under Basel III norms and suggested setting up a holding company for all public sector banks.

 

According the proposal, the proposed holding company would hold the government’s stake in all state-run banks and raise capital through debt and equity on their behalf.

 

Link Live Mint

 

 

 

Why Should Govt Inject Fund In PS Banks?

Why should government fund PSUbanks all the time?-By A K Das
Money Life 

At least some of the PSU banks cannot claim to be cash-strapped, especially looking at their cash reserves. By capitalising their reserves instead of seeking fund from the government, they would be rewarding their share holders as well

Press reports indicate that some of the public sector banks (PSBs) are seeking more capital ahead of the budget, which is scheduled to be presented by the second week of July. According to these reports, cash-strapped public sector banks "hit by a higher proportion of stressed assets and global Basel III requirements" have begun listing out capitalrequirements ahead of the budget in July.

In the interim budget, the Congress-led United Progressive Alliance (UPA) government had earmarked Rs11,200 crore as capital for all public sector banks. In 2012-13, the government had, in fact put in Rs14,000 crore. This kind of funding must stop, and thebanks need to be able to generate their required funds from investing public.

Since the last couple of months, all leading newspapers have carried details of the balance sheet of a large number of organisations, including pubic sector banks. The following information has been collected from these announcements:

Name of Bank	Paid up Capital (Rs crore)	Reserves (Rs crore)
Allahabad Bank	544.61	10644.56
Bank of Baroda	430.68	36349.21
Bank of India	643	24629.95
Bank of Maharashtra	839.1	4917.02
Canara Bank	461.26	23660.6
Corporation Bank	167.54	9952.37
I D B I	16.03	202.93
Karnataka Bank	188.42	2863.78
State Bank of India	746.57	146623.96
Syndicate Bank	624.58	11387.25
UCO Bank	1014.71	9624.18
Union Bank	630.31	16544.67

From the above, most of the banks mentioned appear to have healthy cash reserves. If and when they need funds, they should be able to raise it from the investing public either by rights issue or even by capitalising their reserves.

However, in the present situation, specific amounts of assistance appears to have been sought from the government by IDBI and Indian Overseas Bank, and it is likely that some more may join the band wagon to seek capital infusion.

As mentioned above, at least some of the banks cannot claim to be cash-strapped! By capitalising their reserves, they would be rewarding the share holders too.

In the meantime, it is being reported in the press that GS Sandhu, secretary for financial services, has underlined the need for banks to sell off their non-core assets. The companies identified as non-core include rating agencies such as ICRA, CARE, National Stock Exchange (NSE), IL&FS, UTI, Multi-Commodity Exchange (MCX), Stock Holding Corp of India Ltd (SCHIL), Central Depository Services (India) Ltd (CDSL), and asset reconstruction corporations (ARCs). The estimated value of these assets would be around Rs25,000 crore.

As we can see from the details given above, the reserves are huge, compared with the paid up capital of these state-rund lenders. It is pay back time for these banks. Why not buy out the government share in line with the established formula for this purpose and reduce the government holdings?

Years ago, the Atal Bihari Vajpayee government had suggested that the Centre could reduce its stake in public sector banks to 33% but the move did not go through as the law could not be amended. Now this can easily be achieved and Vajpayee's proposal could be implemented!

After doing this, should the banks need any additional capital infusion, they ought to go to the shareholders instead of going back and forth to cash rich Life Insurance Corp of India (LIC) and other similar institutions, which only means that the Government stake would keep rising, instead of being held by the investing public.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

Link Money Life

India Need To FIX Banking Problems

Need To Fix India’s Banking Sector Woes To Revive Economy – Analysis
source:click here
By Manmath Goel

New Prime Minister Narendra Modi is said to have a master plan of sweeping reforms to revive the economy and return it to a high growth trajectory. However, the Indian economy still has fault lines that can derail future growth. Certain measures must be implemented to stabilise the economy in the short run and guarantee a resilient recovery. Foremost among these is fixing the banking sector.

Indian banks have long been criticised for having convoluted governance structures, low profitability and a tendency to accumulate bad debt or non-performing assets (NPAs) – loans that have stopped yielding interest. While the total stressed assets (including gross NPAs as well as restructured assets) of private sector banks increased from 3.49 per cent in March 2012 to 4.13 per cent in March 2013, in the case of public sector banks (PSBs), it jumped from from 8.68 per cent to 12.16 over the same period. According to a report by Fitch Ratings, total stressed assets in the entire banking sector will reach 14 per cent of total loans by March 2015.

Sluggish economic growth has made matters worse. Real GDP has slowed down from 8.9 per cent in 2010-11 to 4.9 per cent in 2013-14. Consequently, investment too slowed. Growth in gross fixed capital formation has fallen from 11 per cent to a mere 0.2 per cent over the same period. Credit growth itself has declined from 22.9 per cent in 2010-11 to 15.9 per cent in 2012-13, indicating a constrained corporate sector.

Delays in infrastructure projects have further exacerbated the asset quality of the banks, which have a significant exposure to such projects. As of March 2014, roughly 15 per cent of Gross Non Food Credit by Scheduled Commercial Banks (SCBs) was deployed towards infrastructure. Out of the loans advanced to the infrastructure sector, 20 per cent had already been restructured as of March 2013, with the proportion expected to increase to 30-40 per cent over the next two years.
In other words, the banking sector woes stem from a weak economy and stalled projects. However, more dangerously, they can result in a vicious cycle that, by creating a gridlock of investment and credit, can further harm economic growth.

Inefficient public sector banks

The Indian banking sector is dominated by PSBs, which account for 73 per cent of the market share. The banks are constrained by excessive regulation and are forced to increase their exposure to credit constrained sectors. For instance, priority sector lending norms is one of the many stipulations imposed on PSBs by the RBI that erode their competitiveness. On an average, these priority sector loans have been responsible for a relatively higher share of the NPAs among the PSBs over the last ten years.

Moreover, these banks have been found to have inadequate internal credit appraisal and risk management mechanisms. This is evidenced from the fact that banks with higher credit growth in 2004-08 ended up with higher NPA growth in 2008-13. Further, it is a well known fact that PSBs lack an appropriate mechanism in place to deal with stressed assets – a significantly higher proportion of NPAs are written off instead of being reduced. Weak recovery of bad loans, in turn, leads to poor balance sheets.

The symbiotic relationship between the PSBs and the government adds to the fragility in the Indian banking system. Inefficiency in recognizing stressed assets early as well as improper treatment of NPAs ultimately leads to moral hazard. The onus eventually falls on the government to rescue the failing banks.

Preventing a systemic crisis

The situation in India’s banking sector appears grim but it is not totally out of hand. Importantly, according to economic forecasts, India’s economic growth has bottomed out. This will improve the investment sentiment as well as the cash flow in the corporate sector, thereby reducing the quantum of stressed assets. However, pinpoint reforms to make a robust banking sector must be implemented. Three of these are discussed below.

Divestment: A recent report by the PJ Nayak committee recommends reducing the government’s stake in PSBs to less than 50 per cent. Although previous governments have categorically denied a push to divest the state’s stake, the new government has seemed keen to consider the proposal. This is prudent as the government’s limited resources must be directed towards productive development instead of indulging in recursive financing for a flawed banking model. If the playing field is levelled, PSBs will be forced to improve their financial health or be forced out of the market.

Differentiated Banking: Greater public discourse is now pushing the RBI to adopt a differentiated banking structure and promote smaller financial institutions. In fact, two new banking licenses have been granted to IDFC, an infrastructure lender, and Bandhan Financial Services, a microfinance company. This is likely to ease some pressure off the PSBs as well as improve financial inclusion.

Recapitalizing and Restructuring: The RBI recently published a paper, which recommends swift recognition of stressed assets by forming a Joint Lenders’ Forum (JLF); Corporate Debt Restructuring (CDR) for loans above Rs. 500 crore and; an increasing role of asset reconstruction companies and private equity players in the stressed assets market. The Finance Ministry has also proposed to create a holding company to enable banks to raise fresh capital from the market. Such recommendations, if quickly implemented, can dent the pileup of bad loans and provide the banks much needed breathing room.

Big ticket reforms promised by Mr. Modi are likely to resume stalled projects and revive business climate. However, if India is to return to its erstwhile double digit growth, the importance of banking sector reforms cannot be overstated.

Truth Of PSU Banks

Former World Bank economist Percy Mistry, who authored a widely acclaimed report on making Mumbai an international financial centre, says state-run financial institutions need drastic changes in their working and the government should draw up a strategy to exit these institutions. Edited execrpts from an interview with Dev Chatterjee & Abhijit Lele.

After a lot of time, there is some clarity emerging in policy making under the leadership of the new finance minister… What’s your take on the recent policy changes?

The change in FM was long overdue for policy and GoI/MoF credibility to be restored. India had lost all credibility following prolonged macroeconomic mismanagement between mid-2009 and mid-2012. Thank God PC is back. We seem to be on the right track again. However we are not out of the woods by any means. For example, it was shocking to hear the kind of arguments made during the debate on FDI in retail and on the banking bill. I wonder whether the political class in India at the Centre and in the states is aware of economic realities as they are today.

Somehow the political class in India is still under the impression that they have to indulge in the politics of patronage. There is as yet little debate on the politics of development, governance or the delivery of services. The political class still believes that the Indian electorate comprises a bunch of babies that should be given jalebis at election time. In spite of every election which has shown that the electorate wants development and good governance, over 90 per cent of our political leaders seem proud to remain economic illiterates.

After last year’s anti-investor moves like GAAR, the vendetta conducted against Vodafone, and a series of corruption scams that resulted in reversing many licenses, foreign investors’ confidence and the credibility of the government had been completely eroded. But I have to give credit to the present finance minister and the restored vision of the PM – which seemed absent for too long -- for bringing back investors’ confidence both in India and abroad.

The reality is that without massively increased foreign and domestic investment, both FDI and FII over the next 5-10 years, India will be flirting with another severe economic crisis given trends in our current account and aggregate fiscal deficits. Without such investment growth will remain below 6%. The fragile dynamics of our twin deficits will spiral out of control leading to a debt crisis which will trigger a financial crisis leading to a broader economic crisis.

 People do not realize that we are dancing at the precipice of our own fiscal and CAD cliffs and could tip over the edge quite easily if Parliament does not get its act together and move swiftly ahead with other financial reform bills; especially the pensions and insurance bills that are key to bringing in more FDI and FII with multiplier effects.            

(MY Comment:   After all who are those politicians who may be held responsible for creating such a insurmountable fiscal cliff?---Who are responsible for current fiscal crisis and growing CAD? Who are responsible for abrup rise in bad assets in state run banks?

 It is wrong policies imposed on India in a bid to compete with developed countries without ensuring same level of sound administration, police system , judiciary,infrastructure, education , skill etc as characteristics of developed countries like USA and UK ))

In a few weeks, the government will be coming out with its budget at a time when elections are almost set to be declared. Do you think the finance minister will have enough courage to make bold economic reforms? 

What bothers me is that he seems to have very little room for discretionary budgetary maneuver however hard he tries. And there is no appetite or time for making large and bold changes that we need in tax and expenditure policy. What also worries me is that in spite of a devaluation of rupee from a central level of 45 to 55 against the dollar, it has not had any of the positive impact it was supposed to have on the economy (like increasing exports, a higher level of import substitution and reducing aggregate demand for imports. 

Today India’s imports are still very high and we are still not on track for import substitution. The government should also look at making Gold ETFs more advantageous to small investors. At present there is not much difference on the price between the gold and the ETFs and therefore there is not as much demand for gold ETFs as there should be. 

Clearly we need to do what we can to reduce demand for physical gold and increase demand for paper gold derivatives. Any plans to increase import duties or have quantitative restrictions on gold imports will only encourage smuggling of gold in the country. That will be very difficult to control.

Besides don’t forget the current political scenario. The Congress is on the backfoot on corruption charges and given its performance from 2004-13 it does not really deserve to get re-elected if there is any justice in the real world. The BJP does not have a clear leadership plan and no one knows what it stands for when it comes to economic policy. What we do know it stands for is not very comforting for communal harmony. The third front strategy is not clear at all. Mulayam and Mayawati will always be available to the winning side. But it is almost impossible to see a third front being cobbled together that will have a cohesive and credible national economic policy, foreign policy, defense policy of home policy.

 So I do not see the prospect of the kind of political stability that will provide the kind of comfort that investors (foreign and domestic) need and demand for the next few years… we are heading for either 1986-1991 situation or the 1996-99 situation when politics was so fractured that there was an election every year. I don’t think the finance minister has much space for maneuver in these circumstances. I see all kinds of constraints on him to take big, bold economic reforms measures.

RBI and government are working on giving new banking licenses for bringing more people into banking fold? Does that make sense?

No it does not. The problem in India is not that we do not have a sufficient number of banks. It is that 70% of our banking system is state-owned, inefficient, un-inclusive, and provides the means by which too cosy a nexus between the government and the wrong kind of private industrialists. 

The state-owned banks ( SOBs) and insurance companies (SOIs) together provide the institutional mechanism to foster a dangerous and damaging type of crony capitalism regime in India as well as to indulge in electorally driven loan melas and loan write-offs. . That unfortunate nexus is decidedly kleptocratic in nature when it comes to looting the nation’s natural resources (whether spectrum or mineral or land) through the kind of public-private partnership that India does not need. Moreover the Indian fiscus cannot afford to keep meeting the capital needs of the state-owned banks. And the SOBs certainly do not serve the interests of the poor or the disenfranchised. 

In fact quite the opposite is the case. Any proper cost-benefit study of the performance of state-owned banks would show that the cost of having these SOBs is far higher than the supposed benefits. The same is true of Air India by the way and a jost of other SOEs (or what we call PSUs).

In that context creating new private banks to compete for 30% of the banking pie does not seem to me the answer to the problem of making the banking system more capable, responsible, efficient and inclusive. The answer lies in privatizing the SOBs and SOIs and in giving far more room to foreign banks to enter and serve the Indian market without the extreme restrictions that the RBI imposes on them. Many people will look to the 2008 crisis and say that is exactly the wrong solution for India. They would be wrong and would be looking at the wrong lessons to learn. 

I worry that many of the new licenses will be given to unfit and improper persons that are politically well-connected rather than potential bankers of judgment and probity. Look at the line up (of those interested in opening banks) and you would need to worry about the “fit and proper test”.

The problem is not also with how many banks we have. Many new banks were set up when RBI gave licenses in two rounds. Apart from Axis, ICICI and HDFC, there are no other solid private banks that have emerged as stronger or better.

In my view as long as Indian banking is dominated by SOBs we will not achieve any of the objectives of the banking system reform that we so urgently need.

What about giving licenses to industrialist to open new banks? 

Although many in India regard me as the prime ayatollah of market fundamentalism I do not think large industrial houses should be allowed to run banks. There will be massive scope for malfeasance. It is only in Japan and Korea that industry/trading houses (zaibatsus and chaebols) have got banks under their vast and diversified umbrellas. Japan is still struggling with the two decade old financial crisis. It is when ownership of banks is distinct from that of industry, media and services that the economic and financial systems work best.

Banking space is dominated by state-owned banks in the name of serving public interest? 

We in India refuse to accept that the state-owned banks (SOBs) and SOIs are not our strengths but our greatest weakness. They are transmission mechanisms through which government encourages crony capitalism, and entrenches its economic power. 

If India was transformed after the 1991 reforms -- which in the light of recent history should be more appropriately referred to as the Narasimha Rao reforms than the Manmohan Singh reforms —it was because those reforms put some space and distance between our political system and the economy. 

Where we have malfeasance, corruption and inefficiency it is directly correlated to situations where that space between politics and economic remains too narrow. The SOBs and SOIs bridge that space between politics and economics and diminish India and its prospects by doing so. 

We have 18 public sector banks and one SOB (SBI group) that accounts for 25 per cent of market. Punjab National bank, which should be a pan Indian bank, is only strong in the Northern region. The FM should seriously consider privatizing all the SOBs other than SBI and PNB for the time being and examine the impact of that experiment.

And all the evidence suggests that the one thing that SOBs and SOIs do NOT do is serve the public interest. They serve the interests of their managements, staff, the public sector employees unions and of central and state governments that can exert influence over economic agents through them. SOBs and SOIs are our greatest source of systemic risk.

In India there is a huge hue and cry for financial inclusion? Is that a good thing?

A) That is partly so since state-owned banks are so dysfunctional and they do not work. All this euphemistic talk of expanding financial inclusion in India terrifies me. It is one factor which led to the global financial crisis in 2007-08 when Greenspan thought that the idiotic things that US banks were doing – by lending Mexican gardeners multiple mortgages at 130% of home value and classifying these loans as being made to ‘landscape architects’ -- were great in the name of financial inclusion. Mexican gardeners were being included in the wealth chain of California, Arizona, Colorado and New Mexico. Now we can all see what that led to.

It is not as if we have not tried inclusion before in India. Only then we called it agricultural and rural credit. The banking system has taken massive repeated losses with that type of lending. That has also been the experience of most developing countries around the world. That is not because farmers and rural dwellers are fundamentally untrustworthy. It is because they are poor and exposed to risks they cannot manage.

It is one thing to say we want to introduce more people to the formal payments and settlement system that banks provide. That is all to the good. But, I would be terrified about extending credit through the public banking system to the fundamentally uncreditworthy. It is not that they have bad intentions. They are affected by many vagaries and risks that are out of their control and they do not have the savings or income to manage.

What we need instead of issuing new banking licenses is a clear strategy on how the government exits from state-owned banks. The other institution that I have become very worried about is the Life Insurance Corporation of India (LIC). It is has become the largest institutional investor in the Indian economy and it functions in a manner that is not entirely publicly accountable, transparent or clear. Its investment decisions and their timing are a mystery to me and most others. Sometimes they seem to be driven more by political rather than fundamentally economic or cyclical decisions.

Given the way our state functions, it worries me. For me, real systemic risk in the Indian financial system is probably caused by the LIC and the state-owned banks.

You must have seen in most of the disinvestment program, LIC becomes an unofficial underwriter for the government? 

It is not a disinvestment program. It is simply moving assets of from one side of government ownership to another side. The camouflage fools no one. In my view it is time to end all this nonsensical babble about disinvestment for reasons of political correctness. India does not need to proceed with creeping disinvestment. To secure its economic future it needs to proceed on a large scale with sensibly planned and phased privatization. Frankly I fail to see why anyone wants to buy shares in Indian SOBs or SOEs that are controlled and managed by government ministries and ministers. Time and again political decision-making and social policy intrudes in these organizations in what should be entirely commercial decision-making.

In effect, what you are doing with the failure of our disinvestment policy to attract private investors is shifting responsibility for ensuring good corporate governance, SOE accountability and transparency from the ministry concerned to an institutional investor like the LIC. What does that achieve?

No one is asking questions to LIC? 

A) In that context I think that the IRDA Chairman was absolutely right in opposing lifting the investment ceiling for LIC from 10% to 30% in any single enterprise and the MoF was entirely wrong to ignore his advice and force the issue for the sake of expediency.

Is it transparent enough? 

It is an extremely opaque. In fact, that is true of the entire public sector insurance sector. They are not required to report on actuarial risks by tenure or by sector.

It will be very nice to see if someone poses question to what degree LIC pose systemic risk to Indian financial system.

Supposing, the market for whatever reasons were to fall from current level of 19,500 to 15,000 what kind of hit would LIC take on its capital. What happens to its provision reserves? Would we simply say we will not mark-it-to market, which we always do?

LIC should be privatized. It is not just insurance company but also the largest asset management institution in India. But no-body regulates it properly either as an insurance company or as an AMC. I do not see at all IRDA being able to regulate LIC effectively. It is regulated by MoF under the LIC Act. That creates a distinctly unlevel playing field in the insurance sector.

How can you justify impartial arms-length regulation when you do not have a level playing field. The largest insurance company and asset manager is regulated under its own act. IRDA only regulates only 30 per cent of market (private insurers) and no-body asks serious questions about the other.

That is also true in some senses of banking regulation by the RBI. We have three-tiered regulation there as well. In our regulatory system the SOBs are favoured and protected. The private domestic banks are regulated in more draconian fashion and the foreign banks are throttled not regulated.

http://www.business-standard.com/india/news/new-banking-licences-make-no-sense-percy-mistry/497904/

Autonomy To Public Sector Banks

PSU banks' autonomy can be a reality-Business Standard

Lowering govt stake in PSU banks is a good step but autonomy to banks will be more prudent

Shishir Asthana  

 

Call it the need of the hour, a desperate move or smart governance, the decision of the finance ministry to allow  public sector banks to raise resources on their own is a step in the right direction. 

 

A tight fiscal position might have caused the finance ministry to say that it might not be in a position to allocate funds for recapitalisation in the coming Budget. In the Interim Budget, a provision of Rs 11,200 crore was made, which is unlikely to be raised in the final proposal. 

 

The ministry has asked the state-run lenders to meet their capital requirements by offloading government equity, hiving off non-core businesses and issuing bonds. 

 

By not recapitalising the public sector banks, the government is walking on the path suggested by PJ Nayak panel  which was set up to resolve the issue of rising bad loans in public sector banks. One of the biggest problems identified by the panel was government and political interference. 

 

Hiving off non-core businesses would mean a profit in the books of the banks which after paying taxes will be transferred to reserves as retained earnings. This forms part of the Tier 1 capital and thus there would be no change in the equity structure of the promoters. 

 

This will help the banks to free their blocked investments which along with the subsequent leverage will be available to grow their business.

 

Interestingly, banks have been given another novel way of raising funds. The government has given them an option to offload its own share, a kind of divestment in the bank. But the proceeds of the sale will then be ploughed back into the bank at prevailing market prices. By doing this, banks will get their necessary capital though there will be a slight addition to its capital base. The government's re-investment will come in at a premium and though the investment will be money neutral for the government, its stake (which was bought at par) will come down since the same money is now reinvested at the current market price. 

 

Another way of recapitalising available to the bank, which the government has surprisingly not pointed out, is by way of raising fresh capital through the preferential route, just as Yes Bank did while raising $500 million recently. Allowing banks to list their subsidiary is also a good way of raising capital, especially since some of them are holding profit-making subsidiaries like insurance and mutual funds ones. 

 

The new government has taken the right step by deciding to lower its stake but it will be more prudent if there is no interference in the operations of the banks. This according to the PJ Nayak report can come when the government's stake in all public sector banks are transferred to a holding company. This investment will be managed along the lines of a passive sovereign wealth fund aimed at ensuring professionalism. It is only then that PSU banks will be able to operate to their full potential. 

Link Business Standard 

How To Stop Rising Bad Debts

Will Setting Up of National Asset
Management Company Solve NPA 
Problems of Banks in India?

Today a news item has appeared in newspapers wherein bankers have suggested to the new FM to establish National Asset Management company to resolve the issue of NPA in banks.  In the following paragraphs I will discussing whether this can serve any purpose in the current scenario.

In my opinion establishment of National Asset Management Company (NAMC) can do nothing to cure the sickness caused by bad debts.

If Modi government is really interested to improve the health of public sector banks , they will have to strike at the root causes of the NPA i.e. poor management in banks and various other departments of government.  Some of the reasons for current NPA and steps needed to improve the scenario can be summed up as :-

(a) In Banks, government needs to ensure judicious promotion opportunity to all , time bound promotion, end of flattery based promotion, end of bribe based recruitment and promotions, end of posting based on recommendation of powerful officers etc.  They will have to modify the corrupt system not only in banks , but also in judiciary, police department, administration etc too.

(b) Lacs of cases against defaulters of the bank and against NPA borrowers have been filed in various local courts, district courts, Lok Adalats, Ombudsmen, High courts, Supreme court, Debt recovery Tribunals, District Certificate Officers, District magistrate’s court , Sub Divisional Magistrate’ court for taking possession of property seized under SERFAECI Act etc have been filed by various financial institutes including public sector banks but due to manpower shortage or due to inefficiency of executives, or due to malicious intention at various levels of judicial administration are lying pending for years together.

(c)   In number of cases, banks have granted loan against fake deed of landed property or financed to many firms against the collateral or prime security of same landed property.   Have government punished any of Sub registrars or deed writer or bankers who worked with negligence and malicious intention? 

(d)  Banks sanction new loans and advances on the strength of prime of collateral security valued by approved valuers or government recognized valuers. But if these valuers give inflated value of any property after taking extraordinary service charges from loan seeker or with some vested interest or with malicious intention and in turn jeopardize the loan disbursed by banks, what remedial recourse lies with bankers or the government. Bankers at most remove the name of such valuers from their panel or the government blacklist such valuers.  Is there any provision to punish such valuers?   If yes, has any authority or any bankers have ever punished such unscrupulous valuers?

(a) It is observed that Chartered Accountants blindly sign on balance sheets or financial reports of banks and borrowers, companies and firms if they are given attractive amount of money as service charges. These CA while conducting statutory audits of various banks more often than not ,simply put their seal and signature and take attractive fees and charges from banks. Wage without work is the suitable slogan of CAs.  It is also true that CAs have to complete audit of two to three branches in a period of five to six days and hence they can neither make honest and through scrutiny of records of branch of the bank they are asked to audit by RBI nor they have the will to do so because there is no deterrent action if they prefer not to do their duty honestly.  Have government taken any action against any of CAs in the past 60 years which could teach a lesson to team of CA?

(b) Bank officials who sanction credit after taking bribe are able to please their bosses and ensure their timely and unusual promotion and get choice posting. Honest and intelligent officers are sidelined and posted at critical place or remote rural centers so that their voice against evil work may be stopped. Good officers are denied their promotion in time and juniors are given change after taking bribe. Has government ever tried to stop such bribe based promotions and transfers. Not only this even direct recruitment of officers in various scales is also undertaken by bank officials to earn bribe , campus recruitment is allowed in a college based on whims of some senior officers to give favour to his own boys and girls , of his own community. Not only in banks but top ranked officials of all state governments and central government resort to mass transfer and earn money in lieu of giving favour to staff who desire choice posting and timely promotions.

(c)  Police officers do not lodge FIR in their registers, do not execute warrants issued against VIPs by various courts ,do not question criminals but tortures the person who wish to lodge complaint against criminals , defaulters and law breakers.  Has government taken any step in last 60 years to change the system and procedure of police department which give them unrestricted powers and which tempts them to take whimsical decisions and arbitrary action against honest and true citizens?

(d) Hundreds of cases filed against corrupt officers related to misuse of power, fraudulent activities, bribe led lending, lack of monitoring, negligence of duty, favour to dishonest contractors, passing of bills of unscrupulous suppliers, passing of fake bills or inflated bills either lie pending for disposal for years together in the office of Vigilance office, CBI,Anti Corruption bureau, or Human resource department for decisive action against erring officers or such files are closed acquitting erring officials . New trend has developed in government offices to burn the loss of files related to corruption of high profile officers. File are made untraceable or declared lost.  Why?  Is there any mechanism or tool in the rule book or almirah of the government to prevent such malpractices which frequently and recurrently occur almost in all offices, departments and Secretariats of various Ministries? 

(e) Political stalwarts spread propaganda that loans of poor farmers or big businessmen will be waived by the government or by the bank.  Such ill motivated propaganda ultimately vitiates the atmosphere of recovery. Government announces waiver scheme from time to time for electoral gain.  As a result borrowers of the bank willfully default in repayment of bank loan. Quantum of Non Performing Assets known as bad assets in public domain continues to rise year after year in all public sector banks. Then process of compromise and write off starts at bank level and again there is unhealthy transaction of money between bankers and borrowers or between brokers and officers who decides to sanction sacrifice loan amount. 

Ultimately culture of non-re payment of loan by borrowers back to banks takes the root and bankers have to suffer huge loss due to high provisioning and due to rising NPA. For this purpose bank officials , union leaders and politicians all are friends and relatives of each other.   Government has not courage, no will, no effective tools to punish bad politicians because government is made of such corrupt politicians only. Government has no courage to punish kith and kin of powerful politicians and bureaucrats who have willfully defaulted in repayment of bank loans and payment of tax dues or other charges due to government.

Thus, I am of the view that setting up of National Asset Management company will simply transfer the bad debts from traditional banks to proposed NAMC or Asset Management Company called as ARC.It remids a proverb "Old Wine In New Bottle"

 Government may force banks to sell bad debts at heavy discounts which will ultimately cause loss to none other than investors and depositors . Because any erosion in profit of public sector bank may reduce the capacity of banks to pay higher interest rate on deposits and reduce the capacity of banks to pay higher dividends to investors.  There is a need to look much beyond the mere setting up of another company for parking NPAs.

SBI To Merge Subisaries OR Not

SBI associate banks rally on merger buzz-Business Standard-
( My views on Merger Plan given Below )

Three associate banks of State Bank of India jumped by 8.1% to 14.62% at 14:06 IST on BSE on reports that SBI is planning to merge its three listed and two unlisted associate banks with itself.
Meanwhile, the BSE Sensex was down 18118 points, or 0.71%, to 25,402.51

India's largest commercial bank by branch network State Bank of India (SBI) rose 0.76% to Rs 2,685. The stock hit high of Rs 2,731.05 and low of Rs 2,662.25 so far during the day.
 
State Bank of Mysore advanced 14.62% to Rs 618.35 after hitting 52-week high of Rs 647.40 in intraday trade.
 
State Bank of Travancore surged 8.53% to Rs 654.05 after hitting 52-week high of Rs 662.90 in intraday trade.
 
State Bank of Bikaner and Jaipur jumped 8.1% to Rs 617.75 after hitting 52-week high of Rs 660 in intraday trade.
 
State Bank of Mysore had outperformed the market over the past one month till 10 June 2014, surging 33.16% compared with the Sensex's 11.26% rise. The scrip had also outperformed the market in past one quarter, jumping 37.56% as against Sensex's 16.64% rise

State Bank of Bikaner and Jaipur had outperformed the market over the past one month till 10 June 2014, surging 56.97% compared with the Sensex's 11.26% rise. The scrip had also outperformed the market in past one quarter, jumping 95.3% as against Sensex's 16.64% rise.

State Bank of Travancore had outperformed the market over the past one month till 10 June 2014, surging 49% compared with the Sensex's 11.26% rise. The scrip had also outperformed the market in past one quarter, jumping 63.08% as against Sensex's 16.64% rise.

Shares of three listed associate banks of SBI rallied on reports that SBI is planning to merge its three listed and two unlisted associate banks with itself. A newspaper quoted SBI Chairman Arundhati Bhattacharya as saying that the timing is very conducive now to look merging the associate banks.
As at 31 March 2014, SBI owned 75.07% stake in State Bank of Bikaner and Jaipur, 78.91% in State Bank of Travancore and 90% in State Bank of Mysore. State Bank of Hyderabad and State Bank of Patiala are the other two unlisted associates of the SBI.

Meanwhile, with reference to the news item appearing in a leading financial daily titled "Banking Behemoth: SBI to Merge 5 Arms with itself", SBI during market hours today, 11 June 2014 clarified that no such proposal has been formally taken up for approval. While the Bank has always had plans to consider merger of the associate banks, eventually, a position which has been stated by the bank from time to time since long, the matter had not been under active consideration for quite some time, SBI said. Going forward, the bank may examine the merger options afresh, when considered appropriate, but preparation of a possible roadmap would take a few months, SBI added.
Meanwhile, in an another clarification, State Bank of Bikaner and Jaipur during market hours today, 11 June 2014 clarified that no such negotiations are taking place at the moment and there is no such information that has not been announced to the Exchanges, which could explain the aforesaid movement in the trading.

Link Business Standard

My Opinion Given a few days ago are resubmitted below

How To Cure Sick Banks

Ministry of Finance under newly formed Government under the leadership of Mr. Narendra Modi and under the guidance of Finance Minister Mr. Arun Jaitley has once again racked the issue of merger and consolidation to save ailing banks .

It is well known that MOF has  been floating the  idea of merger of public sector banks since long , say for several years to create strong bank which can compete with foreign banks , which can provide big loans to infrastructure companies and power companies and which can absorb shock of global recession .

Merger plan was best suited to Finance Minister Mr. P Chidambram who as a person was a clever person and who   knows how to hide the ill effects of political exploitation of public sector banks carried out by his party since eighties in the name of social welfare or financial exclusion or poverty alleviation. Two decades ago, three banks namely United Bank, UCo Bank and Indian Banks were identified as weak banks and merger plan was suggested by leaders who damaged these banks. They however got success in hiding the malady under the carpet by treating all bad assets as good assets and by only setting up one committee or the other. 

Banks which were really bad in eighties and nineties were falsely and fraudulently projected as strong bank by manipulating their balance sheet just like what promoters of Satyam computers did to attract investors. But now those weak banks are resurfacing as bad banks and many other banks have also become victim of wrong policies of the government or victim of good policies executed by bad persons.Banks Like SBI, PNB, Canara which were considered to be strongest bank among Public sector banks are also not falling in the category of weak banks .SBI has declared more than 5% of its assets ( in fact it is more than 20% ) as bad assets though the bank is still  considered as strongest bank .

Then India under the leadership of Manmohan Singh entered into an era of privatization and globalization and got added opportunity to misuse these banks for political gain. Now again position of many government banks have gone from bad to worse, gone beyond control and beyond repair. And therefore need of merger of weak banks has again been suggested by those clever politicians who are only responsible for the growing sickness in these banks.

In eighties Congress Party under the leadership of Janardan Pujari damaged these banks in the name of Loan Melas. After that banks were damaged by person like VP Singh in the name of Loan waiver and Compromise settlement with defaulters. Then in the name of globalization, persons like Manmohan Singh, P Chidambram, Pranab Mukherjee damaged the banks by building pressure on bankers for lending as per their whims and fancies without taking care of recovery and without caring for security of the assets. 

It is none other than the politicians who have damaged the fundamental of banking by promoting the culture of bribery and flattery in recruitment, promotion and posting. As a matter of fact, none of top banker takes interest in safety and security of banks,but  they take all adequate and absolutely full interest to serve their self interest and in keeping Finance Minister happy , in keeping political mentors happy and in keeping all their bosses happy. Top bankers have to indulge in bad practice to win the heart of politicians ruling this country for last ten years.

In public sector banks, majority of  officers work for the pleasure of top officials whereas in private banks they work sincerely and honestly for the growth of their banks. This is the root cause behind growing sickness in public sector banks. 

Culture of flattery and bribery propagated and advocated by politicians have infected deeply into blood of top officials of banks too which has resulted in bad culture in all banks and which has percolated down the line.  Undoubtedly ,it is this bad culture which in now appearing in the form of Rise IN Non Performing Assets (NPA) and Rise in Stressed assets or erosion in capital . 

Bank officers are ready to sacrifice interest of their bank to please not only minister and senior officials but all those who are friends, relatives and recommended persons of Ministers and Top Officials of various departments. This is why, neither RBI nor Government of India is that much worried to know that 15 to 20 of banks assets is stressed and almost all banks have lost their capital . Birds of same feather flock together and they remain united as leaders of UPA are united in protecting corrupt ministers and corrupt officials indulged in 2G, CWG, Coal Scam or any other big or small scam of the country.

Lacs of crores of public money is at stake and almost each bank needs thousands of crores of rupees as capital support to comply Basel III norms. It is unfortunate that no one has till date filed PIL to stop banks' journey from heaven to hell. None has taken interest to stop political exploitation of banks. None has taken sincere interest and initiative to stop corrupt practices going on unabated and unbridled in recruitment and promotion processes carried out  in these banks for decades and that too in the name of Merit oriented policies. Clever management of these banks do not allow even court cases filed against corruption to move and take a decisive turn.

When so called merit oriented recruitment and promotion policy implemented by top officials of the bank for last twenty years has fully damaged the basics of these banks, government is now left with has no option other than merging weak banks with a little bit stronger banks so that volume of bad debts could be concealed and image of these banks could be protected . They may however simple change the dress of these weak banks to look like gentleman . But the sickness has assumed the form of cancer and hence cannot be treated by changing the apparel or by changing the name of the bank only.Politicians can put carpet on malady for the time being but its stinking gas will explode sooner or the later.

If investors in banks become revolutionary and agitated, entire game plan of ministers and top bankers will be exposed before public just as CAG exposed misdeeds of politicians in 2G, CWG,Coal mining and Iron Mining scams and now ruling Congress Party is facing the consequences of their misdeeds in current Lok Sabha election. It is only investors who are not getting adequate dividend on money they invest. It is depositors who are not getting adequate return in form of interest because banks are forced to lend at lower rate of interest. And finally it is bank staff who are not getting respectable wage hike despite their hard work.